THE NEW ZEALAND SECURITIES COMMISSION: THE RISE AND FALL OF A LAW REFORM BODY
BY PETER FITZSIMONS[*]
DISCLAIMER: This article has been scanned from a printed source. It has been proof-read but may still contain errors or inconsistencies. Please refer to a printed version for complete accuracy when quoting from this document.
it is easy to foresee the Commission ... holding a central position in shaping
the future of all corporate and securities law and practice and moulding it to
meet the ongoing needs of the commercial community and the investing public.
The new Commission has been given a wide range of tasks for a part-time Commission and much will depend on the energy and dedication of its members. It seems rather unrealistic to expect it to act as an effective law reform committee as well.
The New Zealand Securities Commission (NZSC) was established in 1979, after the enactment of the Securities Act in 1978. As the above quotes by Darvell and Farrar indicate, commentators at the time held differing views about the NZSC's potential as a law reform body. This article will show that both Darvell and Farrar were wrong in their predictions. Darvell was incorrect because the NZSC would not eventually hold the central position he foresaw, while Farrar was wrong because the NZSC did attempt to operate as a wide-ranging securities law reform body. This attempt failed, not because of a lack of energy, but because of New Zealand's economic and political climate during the 1980s and 1990s and the structure created by the Securities Act 1978, within which the NZSC was forced to operate.
This article examines the law reform activities of the NZSC from 1979 to 1993. Little has been written about the NZSC's law reform role. Studies dealing with the NZSC have tended to concentrate on describing or analysing specific proposals put forward by the NZSC, and they have not attempted to analyse the overall law reform efforts of the NZSC or the overall success of the NZSC as a law reform body. Part I of this article will briefly consider the establishment of the NZSC. Part II will consider two of the most important factors which impacted on the NZSC's overall law reform programme. In Part III I will discuss the NZSC's specific law reform efforts, particularly those related to nominee shareholding and takeovers. In Part IV I will discuss the reasons for the failure of the NZSC's law reform efforts, and in Part V I will briefly discuss possible reforms that should be made to the process of securities law reform in New Zealand.
II. THE ESTABLISHMENT OF THE SECURITIES COMMISSION
New Zealand's securities laws were relatively unsophisticated prior to the passing of the Securities Act 1978. A number of pieces of legislation dealt with some areas of securities law, but in general they did not have a significant impact on securities regulation in New Zealand.
Thus, for example, prospectuses issued by public companies were governed by provisions in the Companies Act 1955 which had been put in place when the Act was passed. The Companies Amendment Act 1963 introduced limited controls for written takeover offers. This Act required fourteen to twenty-eight days notice prior to the written offer being made, and the provision of information by the bidder, but (unlike overseas jurisdictions) did not require a mandatory bid for all shares nor for the payment of the same price for the same class of shares. In addition, New Zealand's securities laws lacked specific provisions relating to insider trading, the disclosure of substantial security holders, and financial reporting.
The lack of substantive securities laws was combined with the absence of a state regulatory agency in the securities field. The MacArthur Committee had recommended the establishment of a "companies commission" in the early 1970s, but the government did not act upon this recommendation.
The absence of substantial securities laws changed during the late 1970s. During the mid-1970s New Zealand saw the collapse of some major companies which had acquired funds from the public. These companies had set up their fund-raising activities so that they were able largely to avoid the existing regulations and the protections provided for the investing public by those regulations. The response of the government under public pressure was to introduce the Securities Act 1978 which was aimed at controlling the "activity" of raising funds from the public, rather than the "entity" which was raising the funds.
The major rationale for the enactment of the Securities Act 1978 was the "market failure" theory of regulation. This theory takes the view that a failure that occurs in some aspect of the market can be cured or alleviated by government intervention or regulation. Thomson, in introducing the legislation, referred to these financial collapses as requiring a government response in order "to give a greater degree of protection to the public". Accordingly, investor protection was stated to be the main thrust of the new regulation, with the proviso that the commercial community was not to be burdened by excessive and inflexible regulation.
The Securities Act 1978 provided regulations controlling fund raising, and also provided for the establishment of the Securities Commission. Part I of the Act dealt with the Securities Commission, and Part II provided the substantive provisions dealing with the registering, issuing, and advertising of securities which were to be offered to the public.
The Minister of Justice described the NZSC's functions and powers as:
first, to exempt any person or class or persons [sic] from compliance with any
of the provisions of the Securities Advertising Bill upon such terms and
conditions, if any, as thought fit - I envisage that this power will be
exercised when less disclosure than that required by the Bill is considered
adequate; secondly, to cancel the registration of prospectuses, and, at its
discretion before so doing, to hold hearings and summon witnesses for
examination on oath; thirdly, to hear appeals from decisions of the Registrar
of Companies made under the Bill; fourthly, to keep under review and make
recommendations for amendments to the law relating to bodies corporate,
securities, and unincorporated issuers of securities; and fifthly, to perform
such functions as are conferred on it by other enactments. This function
recognises that the commission may well have further responsibilities arising
from any future review of the law relating to the securities industry.
The words of the Minister were translated into section 10 of the Securities Act which set out the functions of the Securities Commission as:
(a) To perform the functions and duties conferred or imposed on it by or under
this Act or any other enactment; and
(b) To keep under review the law relating to bodies corporate, securities, and unincorporated issuers of securities, and to recommend to the Minister any changes thereto that it considers necessary; and
(c) To keep under review practices relating to securities, and to comment thereon to any appropriate body; and
(d) To promote public understanding of the law and practice relating to securities.
When the NZSC was established the government clearly had in mind that it would produce regulations outlining the requirements for prospectuses for initial securities offering, and supervising the primary securities market. While the Minister of Justice had briefly referred to a wider role for the NZSC in reviewing practices in the securities market, there was no specific indication from the government that the NZSC should set out to reform the law in relation to the secondary securities market. Apart from the need to deal with primary securities offerings no particular problems were identified as needing examination and reform, and certainly there was no identification of takeovers and nominee shareholdings as areas in need of reform. However, section 10(b) and (c) potentially gave the NZSC a role which was not limited to the regulation of primary securities offerings. With the aid of these provisions the NZSC, in the decade after its establishment, proposed reforms in both the primary and secondary securities markets. The breadth of these subsections provided the NZSC with an opening in order to take a greater role in shaping New Zealand's securities laws than that envisaged by the government.
III. FACTORS AFFECTING THE NZSC'S LAW REFORM INITIATIVES
Before examining the NZSC's law reform proposals in detail two factors which directly impinged on the direction and success of these proposals will be briefly examined. The first factor is the impact of the New Zealand Treasury on the economic policies of the government. The second factor is the appointment of Colin Patterson as the first chairperson of the NZSC.
1. The New Zealand Treasury's Role in Economic Policy Making
A number of studies have examined the role of the Treasury on the formulation of government policies from the early 1980s through to the present. They show that the Treasury had the capacity to influence economic policy during this period and that it exercised that capacity.
The influence of the Treasury came about because of its central role in the policy-making process. As Boston notes, the final decision-maker on all important matters of public policy is the Cabinet. While advice for the Cabinet potentially comes from a number of sources, the Treasury has been the most important of the advisory bodies in the post-war era in relation to economic and financial policy.
There are several reasons offered by Boston for the Treasury's influence. The first is that the Treasury has been given responsibility for "overseeing public accounts, controlling public revenues and expenditures, supervising the financial operations of government departments, and providing financial information on the activities of the central government". Boston argues that this enables "the Treasury to exert an influence over almost all areas of governmental activity". The second reason is that the Treasury plays a central role in the process of advising the Cabinet, which, as noted, is the final decision-maker on policy. A procedural rule for proposals coming before the Cabinet provided that all proposals having economic, financial or revenue implications were not to be accepted by Cabinet without the Treasury either endorsing the proposal or providing a separate report. As most policy proposals have economic significance, this rule obviously places the Treasury in a strategic position to affect policy debate and direction. The ability to comment on proposals was not the only advantage held by the Treasury. The Treasury reports were distributed to all Cabinet ministers with proposals and tended to be shorter in length, and more cogently argued, than the proposals themselves. As ministers, in general, are under significant work pressures, the shorter Treasury reports tended to receive greater attention than the proposals themselves. Consequently, these factors, together with other procedural and administrative arrangements, meant that an adverse Treasury report would make it difficult for a proposal to be accepted and easier for the Treasury to dominate policy decisions.
A third reason for the Treasury's position of dominance in the area of economic policy offered by Boston included the Treasury's capacity to set the agenda for policy considerations and to set the conceptual framework within which policies were debated. This influenced the "kind of questions that are asked, the way the problems are defined, and the policy options that are considered relevant". A fourth reason is the strong support that the Treasury had in Cabinet. The Minister of Finance is generally one of the most senior members of Cabinet, and the Minister was able to add political weight to the policies put forward by the Treasury.
Two further reasons are offered by Boston for the Treasury's dominance in policy advice. The first is that the Treasury recruited many of the top economics graduates in the country, with the result that "it enjoyed more intellectual fire power than most of its bureaucratic rivals". The second is that there was no powerful bureaucratic rival to the Treasury in relation to the provision of economic policy advice. In addition, Goldfinch and Roper argue that "because of the close links between Treasury and business, a government which consistently ignored Treasury advice would risk losing business confidence".
The influence of the Treasury was accompanied in the 1980s by a change in the economic policies that it advocated. During the period from the 1950s through to the 1970s, the Treasury followed a Keynesian economic framework. This approach changed so that:
By the early 1980s ... the Treasury had become more inclined towards a
monetarist perspective. It had adopted a conceptual framework for analysing
policy issues based on a mixture of agency theory, a transaction-cost
perspective, and a concern with the specification of property rights.
With the winning over of the Labour Party to the Treasury's economic policies, and the election of the Fourth Labour Government in 1984, the government set about an economic programme of deregulation and reform which closely matched that advocated by the Treasury. This programme was largely continued in the Labour Government's second term and by the National Government which won power in 1990.
The Treasury exerted considerable influence on the economic policies pursued by the government. This influence would extend to the area of securities law reform. Whether the members of the NZSC were aware of it or not, the change in Treasury's economic policies in the early 1980s would have a significant impact upon the success or failure of its proposals, and ultimately upon the NZSC's role as a securities law reformer.
2. The First Chairperson
When the government set up the NZSC, it was seen as "a small but very efficient commission that [would] operate very largely as a commercial self-regulating machine of great flexibility". Hence, the Commission was to be composed of five part-time members with the chairperson required to be a barrister and solicitor. By the time the first members were appointed in May 1979 the government had decided to make the chairperson a full-time appointee, and the first chairperson was Colin Patterson. Just prior to this appointment, Patterson had been the chairperson of the Contracts and Commercial Law Reform Committee ("C&C Committee"). He had also been the chairperson of the Working Party on Negotiable Instruments, which had reported to the government in 1977.
Patterson, who had been involved in law reform work since the mid 1960s, had a traditional law reform perspective, and he initially approached law reform on the basis of established legal principles and concepts. This approach did not take into account economic concepts nor did it evaluate proposed reforms in economic terms. This approach did not last as Patterson and the NZSC soon realised that economic theory and concepts had begun to play a part in securities law reform in the 1980s.
Patterson was prepared to expand the role of the NZSC into areas of securities
law reform outside the primary securities issues under the Securities Act 1978.
Although the NZSC was only established in May 1979, and only moved into its new
offices in October 1979, the
NZSC published a paper on the topic of nominee shareholding by November of
that year. By 16 May 1980
it had published terms of reference in relation to the reform of takeover law
after its observations of "recent takeover activity ... led [it] to the
conclusion that the law on the subject is deficient". In a little over a year the
NZSC, with its one full-time member and three professional staff, had taken up the task of
producing regulations for the Securities Act 1978, as well as initiating reforms
in two major areas of securities law.
IV. THE NZSC AND SECURITIES LAW REFORM
When the NZSC was set up the government did not identify any particular areas of reform apart from the need to produce regulations for primary securities offerings. Certainly there was no identification of takeovers and nominee shareholdings as areas in need of reform. The NZSC, in the decade after its establishment, proposed reforms in both the primary and secondary securities markets. The proposals for the primary securities market were implemented, while the proposals for the secondary securities markets were, in general, opposed.
In this part the NZSC's law reform programme will be considered in terms of contentious issues (such as takeovers and nominee shareholding) and non-contentious issues (such as regulations for the Securities Act and regulations for contributory mortgages). The dividing line between the two was determined by the government's treatment of the relevant proposals, and the opposition of the Treasury.
1. Non-Contentious Law Reform Issues
The non-contentious law reform issues put forward by the NZSC were the regulations required for the operation of Part II of the Securities Act 1978, and the specific regulations for contributory mortgages. The reform process for the contributory mortgage regulations spanned the period 1978 to the present. The government's stance and the NZSC's views in relation to these regulations are instructive in that they serve to highlight the difficulties the NZSC would face in attempting to put forward law reform proposals on the contentious issues.
The regulations for the Securities Act did not come into force until 1983, although the NZSC had been established in 1979. The length of time taken can be explained in terms of the amount of time required for consultation. The time taken did not appear to involve any government interference or government reticence about the proposals put forward. The NZSC provided recommendations for regulations to the Minister of Justice on 3 March 1983. These regulations came into effect, together with Part II of the Securities Act, on 1 September 1983. In the light of the length of time it would take ultimately to obtain government approval for some of the reforms put forward by the NZSC, six months was in fact a relatively short period of time.
In relation to the contributory mortgage regulations, the NZSC started working on the necessary regulations in 1980 and 1981, and proposals were published in December 1981. By 1985 revised draft contributory mortgage regulations were published and distributed to interested parties to the obvious relief of the NZSC.
Having reached a position of agreement with interested parties on the terms of the contributory mortgage regulations, the NZSC then found that the Parliamentary Counsel was unable to consider the draft regulations, a position which appeared to prevail for a considerable period of time. Finally, the Securities Act (Contributory Mortgage) Regulations 1988 were passed and came into force on 1 January 1989. There is a certain irony in the length of time that it took to produce these regulations, given that the original impetus for the Securities Act and the NZSC was the failure of a number of contributory mortgage schemes in the mid-1970s. There was no suggestion that the government lacked enthusiasm for this project, or opposed the proposals. There was also no suggestion from the NZSC of the pressing need for this type of regulation (which differs from its stand regarding nominee shareholder provisions), and it is clear that from an early stage the NZSC wished to have this matter out of the way quickly.
2. Contentious issues
Unlike the regulatory changes discussed in the previous section, the reforms that ultimately resulted in the NZSC losing any claim to being "the" securities law reform body were not those referred to it by the government, but rather those which it initiated. The NZSC launched into investigations and reform proposals for takeovers and nominee shareholdings without any promptings or suggestions from the government.
(a) The first period: 1979 to 1986
During this period the NZSC put forward proposals for reforms of nominee shareholdings and takeovers. It moved quickly to put these areas under review after its establishment. A discussion paper was produced on nominee shareholding in November 1979, and terms of reference for a review of takeover law were published by May 1980 after the NZSC's observations of "recent takeover activity ... led [it] to the conclusion that the law on the subject [was] deficient".
The interest of the NZSC in the reform of nominee shareholdings is shown in its 1981 Annual Report. The NZSC stated that:
While awaiting receipt of comments from interested parties on the proposals for
securities regulations, the commission instituted a review, pursuant to section
10 of the Act, of the law and practice relating to nominee shareholdings in
This review took the form of the publication of a discussion paper on nominee shareholdings in 1979, one of the first papers published by the NZSC after its establishment. No reason is set out in the paper as to why the NZSC felt that this issue should be reviewed.
Following the publication of the paper and after receiving responses which indicated general agreement with the principles of the reform, the NZSC produced draft legislation in 1982. In May 1982 the NZSC
[p]resented to the Minister of Justice a recommendation for the enactment of
legislation to require disclosure of the ownership of relevant interests in the
issued shares of public listed companies that aggregate more than 5 percent of
the issued capital.
The NZSC was disappointed with the government's response to its first attempt at putting forward legislation for the reform of securities law. The Minister of Justice decided that the government would defer a consideration of the NZSC's nominee shareholding legislation until the NZSC had completed its review of takeover law and practice (which it had initiated in 1980). Not satisfied with this response, the NZSC returned to the Minister the following year and asked for a review of its recommendations, and stated in its annual report "that such legislation should be enacted independently of the review of takeover law".
The Minister did not offer any reason for the refusal to consider the recommendation, other than a desire to tie these recommendations in with the takeover review. But, by late 1983 at least, the change in the economic policies advocated by the Treasury may have had an impact upon regulatory reform. The 1981-1984 National Government had clearly not embraced the policies that would characterise the Fourth Labour Government, but the Treasury, with a different view as to the appropriateness of regulation, was in a position to oppose policy of which it disapproved. As this proposal came from the NZSC (which only had powers to recommend reforms) and not from the government, it would be easier for the Treasury to oppose the proposal, or at least to delay its consideration, given its ability to comment upon proposals put forward for consideration by the government.
Why would the Treasury have been opposed to this proposal? A clue can be found in the reasons put forward by the Treasury in opposition to the NZSC's takeover proposals (which were published in 1983). One of the comments made by the Treasury was:
Regulations which do not allow takeovers to take place with speed and
secrecy will weaken the incentives to acquire this type of information
in the first place. The gainers will be inefficient management, while society
as a whole will be a loser.
The significance of this quote is that the Treasury would have opposed nominee shareholding provisions since, by their very nature, they sought to "expose" activity in the marketplace and thereby prevent "secrecy". Whether or not the Treasury was able to affect the Minister of Justice's views on the proposed legislation, the linking of those recommendations to the takeover review gave him a way to defer considering them. Certainly once there was a change of government in 1984 the Treasury's view on regulation, and the acceptance of these views by the government of the day, gave the proposals little chance of success during this first period.
The second securities law reform issue taken up quite early by the NZSC during this period was that of takeover laws. Unlike the NZSC's approach to the nominee shareholding review, the NZSC first carried out investigations into particular transactions before deciding to publish proposals for discussion.
The proposals were finally published in 1983 in three volumes. At the same time as the NZSC was promoting its takeover proposals it made it clear that it was not associating the nominee shareholding legislation with the takeover law reform proposals. If the takeover laws met opposition the NZSC clearly did not want to see its first proposal held back.
The NZSC's view on takeovers was "that [its] proposals [were] designed to allow competition for the control of companies in an open and informed market for control". These proposals included requiring a formal offer to be made once twenty percent of a company's capital had been acquired, requiring the offeror to pay the same amount for each share acquired, placing time constraints on accepting offers, and requiring certain additional information to be disclosed. As Banoff notes, the theoretical bases for these proposals were that there should be equal treatment for all shareholders (including minority shareholders), that the market for corporate control was not sufficiently competitive, and that the sharemarket was undervaluing the shares of potential targets. If, in fact, the NZSC was attempting to put its "best foot forward" by collecting evidence to support its position in anticipation of having to provide a strong argument for the legislation proposed, and in anticipation of receiving criticism for its views, then its concern proved to be correct.
In a detailed submission, the Treasury made clear its view on the basis for economic activity and also on the NZSC's proposals. Its view of the regulation of takeovers has been noted above. In the light of this view, and after an analysis of the NZSC's proposals in detail, the Treasury stated:
In all these ways the [NZSC's] proposals will make takeovers more difficult and
costly, thereby reducing the incidence of takeover activity and increasing the
degree to which management can be lax in its use of resources before facing
this form of market discipline. This analysis is supported by empirical
evidence showing that laws along these lines are associated with a substantial
rise in takeover premia. The proposals would also make it much more difficult
and costly to assemble substantial minority blocks of shares and to wage proxy
contests for control. It is clear from the analysis of Sections II and III
that laws implementing such proposals would significantly reduce both the
incentive effects of potential takeovers and the real gains from such takeovers
as do occur. They would also greatly reduce the effects of possible contests
and the amount of monitoring associated with the holding of substantial
minority blocks of shares. As a result agency costs would be increased through
reductions in the monitoring of management teams and in the incentives for
efficiency in management.
The Reserve Bank also found itself disagreeing with the NZSC's proposals. While the Reserve Bank did not condemn the NZSC's proposals outright, it is apparent that it did not accept the NZSC's views on the objectives and form of takeover regulation.
Although the NZSC would have been disappointed with the reactions of the Treasury and the Reserve Bank, it would have been further dismayed with the reception of its nominee shareholding and takeovers from the government. The NZSC's concerns that the nominee shareholding and the takeover reform proposals would be linked came true, with the Minister of Justice delaying consideration of the nominee shareholding proposals until the takeover law review was completed. This delay effectively left the NZSC in a "catch-22" situation - the government could delay consideration of the nominee shareholding legislation on the ground that it wanted to see both reforms proposed before it took any steps, while the NZSC faced a hostile Treasury and Reserve Bank who were clearly opposed to its takeover proposals. These proposals would go no further if these institutions held any sway in the decision making process (as they obviously did). Accordingly, the NZSC's number one concern for reform, the nominee shareholding legislation, was effectively tied to the NZSC's success in putting forward an "acceptable" proposal on takeovers. As the NZSC's 1983 proposals were not acceptable to the Treasury and the Reserve Bank, the NZSC's number one concern was left in limbo.
Although the Securities Act provides for the NZSC to consult prior to making recommendations and to place a notice in the Gazette fourteen days before making its recommendations, the Securities Act 1978 does not require the NZSC to reach a consensus with persons who are consulted. Consequently, after the publication of its proposals in October 1983 and the receipt of submissions, the NZSC could have moved to recommend draft legislation to the Minister of Justice, taking into account whatever comments it wished. However, as the annual reports of 1984, 1985, and 1986 show, the NZSC did not prepare and present recommendations. Rather, the NZSC carried out further investigations into particular takeovers. Its rationale for this action was that it was "testing the arguments by observation of market practice". A more likely explanation, however, is that the NZSC was not so much testing the arguments as it was attempting to gather further evidence to support its own view of takeover regulation, and to show that the views espoused by the Treasury and the Reserve Bank were wrong. By contrast, the NZSC did not adopt this approach in relation to nominee shareholdings, where it felt it had "widespread support".
It must be emphasised that the NZSC's proposals for nominee shareholding and takeovers were initiated by the NZSC, and not by the government. The government did not request that the NZSC consider these areas, unlike the regulations for the Securities Act 1978 and the contributory mortgage regulations. In addition, the reforms proposed by the NZSC took it outside the particular law reform terrain that the government had in mind for it in 1978, which related primarily to reviewing, designing, and updating the financial disclosure requirements under the Securities Act and in granting exemptions from the provisions of that Act. In attempting to set its own agenda for securities law reform the NZSC had, at this stage, been highly unsuccessful. The NZSC was not able to translate its objective of equal treatment for shareholders and its concern for the protection of minority shareholders into regulations in the face of opposition from the Treasury.
(b) The second period: mid 1986 to the end of 1989
During this second period there was a noticeable change in the government's attitude toward regulation of the securities market and the NZSC's securities law reform proposals. This change in attitude appears to have been prompted by the substantial increase in activity on the stock market, public outcry in relation to insider trading, and the stockmarket crash in October 1987. For the NZSC this period saw the enactment of nominee shareholding and insider trading provisions, a promise to enact the NZSC's takeover proposals, and a proposal to elevate the NZSC into a more powerful regulatory body with overall responsibility for the securities market.
By the middle of 1986 the government had become concerned about activity on the sharemarket. The sharemarket during 1986 went through phenomenal growth as market capitalisation went from $17, 600 million at the end of 1985, to $42, 436 million by the end of 1986. Against this backdrop the Minister of Justice wrote to the NZSC in August 1986 and asked it "to continue to concentrate on take-over reform and insider trading".
Prior to the presentation of the NZSC's Insider Trading Report at the end of 1987, the stockmarket crash occurred. The effect on the market capitalisation of listed companies was swift and dramatic. Market capitalisation had reached a high of approximately $42, 800 million in September 1987, but this fell by 31 December 1987 to $24, 200 million.
In December 1987, just after the sharemarket crash, the NZSC presented its report on insider trading to the Minister. The report recommended the enactment of laws to allow recovery of compensation by a person who suffered loss at the hands of an insider, the right of a company to recover from an insider an amount of money where he or she traded on confidential information, the disqualification of an insider trader from holding office in a company, and the right of the court to revoke a sharebroker's licence where a sharebroker traded as an insider.
However the report's most significant recommendation, in the light of the history of the NZSC's inability to have its nominee shareholding recommendations enacted, was the very first recommendation:
We recommend that legislation should be enacted to implement our 1982
proposals for the reporting of substantial shareholdings and interests in
shares in listed companies.
A second point is that, in putting forward its recommendation on insider trading, the NZSC was still facing a "hostile" Treasury. The NZSC's confidence in taking on the Treasury in this area was perhaps boosted by the fact that the government had requested this report, and because it appeared that the Treasury's influence had waned during the post crash period. To justify a reversal of its previous position and a rejection of the Treasury's advice, the government reverted to the theme of "investor protection".
Perhaps the clearest sign of a change in the government's attitude to securities regulation and the NZSC's recommendations was the speed with which these recommendations were implemented. The government received the NZSC's report in December 1987, by 31 March 1988 had indicated it would implement the proposals, and by 21 July had introduced the Securities Law Reform Bill for its first reading. This compares favourably with the four years during which the NZSC's nominee shareholding proposals had spent in "limbo".
While the NZSC had been successful in relation to nominee shareholding, this was only one half of its major securities law reform package. The other half of its package was that of takeover reform. The Minister, when writing to the NZSC in 1986, had asked for a review of insider trading and takeovers. However, the NZSC preferred to proceed first on the issue of insider trading, rather than on takeovers, even though it had already prepared extensive proposals on takeovers and had "tested the arguments" in relation to takeovers since the early 1980s. By contrast, the NZSC had not prepared any proposals for insider trading and had not carried out any investigations by the time the request was received, and neither did it stop to do so. By concentrating on insider trading reform first, to which the NZSC could add its nominee shareholding proposals, it was able to increase the possibility of its nominee shareholding proposals being accepted. This approach proved to be the right one from the point of view of the NZSC.
Having put forward its insider trading report in 1987, the NZSC turned its attention to takeover reform. It prepared a two volume report, which it presented to the Minister on 4 October 1988. The Minister publicly announced on 13 October 1988 that Cabinet had approved the NZSC's recommendations for takeover legislation. A week later, the Minister of Justice made the following comment:
The take-over code certainly will ensure that the interests of minority
shareholders would be demonstrably enhanced and that the stealth and unfair
practices that have been evident in the market in recent months would be a
thing of the past. Those proposals, together with insider-trading measures at
present before the House, would also restore a good degree of international
credibility to the sharemarket.
The quick acceptance of the NZSC's proposals also shows the change in the government's attitude from the first period. The legislation recommended by the NZSC was essentially the same as that put forward in its 1983 proposals and which had been rejected by both the Treasury and the Reserve Bank at that time. This serves to illustrate further the divergence of the government from the policies advocated by the Treasury.
In summary, the second period saw, in the light of the substantial increase in stockmarket activity and the occurrence of the crash, the government reassess its approach to securities regulation. This reassessment was accompanied by a lessening in the influence of the Treasury on government policy. For the NZSC it resulted in success in having its law reform projects, nominee shareholding and takeovers, either enacted or a promise obtained to that effect.
(c) The Third Period: The End of 1989 to the Present
The government's public announcement that it would enact the NZSC's recommendations on takeovers, together with the enactment of the Securities Amendment Act 1988, represented the high point of the NZSC's performance as a securities law reform body. By contrast, the third period is characterised, not so much by the government's acceptance or rejection of the NZSC's law reform proposals, as the rejection of the NZSC itself as "the" securities law reform body and its replacement by the government with a number of other committees or bodies. In addition the economic arguments which had characterised the first period returned to the fore. The development of the NZSC's proposals for takeovers and its position as the securities law reform body become intertwined during this period. Accordingly the discussion that follows will consider these issues together.
The selection of the starting, and closing, date for a period is necessarily arbitrary. The end of 1989 was chosen as the end of the second period as at that stage the government was still intending to implement the takeover recommendations. The government had received the Establishment Unit's report (which provided for the restructuring of the regulation of the securities market) in November 1989, and in December 1989 the Minister of Justice stated in Parliament that it was "another measure to be submitted in due course". However, a change had already occurred in the government's approach to securities law reform by late 1988.
The Minister of Justice, in the context of the stockmarket crash, had requested a report from the NZSC on "its functions, staff establishments, and funding". Later, however, the government appointed the Russell Committee to undertake a wider review. Despite the Minister of Justice's statement in 1987 that "the NZSC is an expert body set up to keep securities law under review, and that it has the most effective and comprehensive methods of conducting consultations with the financial community", the government one year later preferred to turn to another body especially established to carry out this particular wide-ranging review. While it could be argued that it was appropriate to have a separate body carry out this review, since the NZSC was in fact to be a part of the supervisory structures, the review of supervisory structures was clearly only one of the issues to be addressed. The main thrust of the review was to examine the law and practice to ensure that the share market was acting efficiently (and fairly), with the government making it clear that capital formation was to be the primary concern of the inquiry. This view is highlighted by the fact that the chairperson appointed to head the Russell Committee was Sir Spencer Russell, a former head of the Reserve Bank.
The question to be raised at this stage is why the government did not entrust this wider review to the NZSC. The NZSC had finished its takeover recommendations earlier in the same month and consequently would have been available to carry out such a review. The Minister of Justice stated that the reason the Russell Committee was set up was to examine why the New Zealand sharemarket continued to perform so badly. However, the terms of reference referred to "reviewing the law and practice" and ensuring "the maintenance of fair and efficient market for the investment in and trading of securities of listed companies", and they did not explicitly refer to examining the reasons for the stockmarket crash. The Russell Committee's task obviously included a law reform role, and not merely one of reporting back with the reasons for the stockmarket's failures.
One possible explanation for the setting up of a separate committee was the desire of the government to appear to be taking significant steps to address the causes of the sharemarket crash. A separate committee, especially set up for the review, could give the impression of concern and a desire to take effective action. If the NZSC had been given the task there may have been a danger that the government's response would be seen as low key and limited to "law" reform issues.
Whatever the explanation, the government had moved to introduce a new body into the area of securities law reform. For its part the NZSC was now relegated to the position of making submissions to the Russell Committee during its inquiries, rather than being the body carrying out the inquiries, receiving submissions, and making recommendations. At this stage the NZSC would not have been unduly concerned as the Russell Committee, although couching its report in economic terms such as "the need to encourage market forces, as far as practicable, as the basis on which to maximise economic welfare" and discussing the economic role of the sharemarket, was not advocating an unregulated securities market. In fact, its desire "to retain the public as participants in securities markets", its favouring of a supervisory authority presiding over self-regulatory agencies, and its view that unfettered reliance upon market forces in isolation would not promote the "involvement of non-professional investors, including `passive' non-resident investors", were not dissimilar views to those of the NZSC. However, the move by the government to set up this Committee was clearly a step away from utilising the NZSC "as an expert body ... to keep securities law under review".
As previously mentioned 1989 closed with the promise of the enactment of the NZSC's takeover proposals. While in 1989 the NZSC had simply mentioned the Minister's announcement, in 1990 it returned to the position of attempting to justify its recommendations by pointing out the benefit for minority shareholders from its recommendations, and the detriment flowing from the delay in introducing this legislation. It also made an appeal to a wider economic issue - that of providing a "mature" securities regime that would be attractive to investors (both onshore and offshore).
The following year the NZSC realised that the promised enactment of the takeover laws might not come to fruition. When the Minister of Justice introduced the Serious Fraud Office Bill on 5 December 1989 he mentioned the introduction of a Companies Bill early in 1990, and the introduction later in 1990 of legislation relating to corporate insolvency and takeovers. The NZSC's recommendations had moved from a position where the government had asked for the recommendations in 1986 and promised to act upon them in 1988, to a position where the Serious Fraud Office Bill, a Companies Bill, the Establishment Unit's draft legislation and insolvency legislation were seen as higher priorities.
One explanation for the delay by the government in moving to enact the recommendations could lie in the strategic position of the Treasury. As noted earlier, the Treasury was required to comment upon any policy going to Cabinet which had economic, financial or revenue implications, and the Treasury had the ability to use procedures to delay Cabinet consideration of departmental proposals with which it strongly disagreed. The Treasury clearly disagreed with the NZSC's recommendations and would have been aided by the length of time it had taken the NZSC to put forward its recommendations from when the Minister of Justice had first asked for them in 1986. The recommendations were not put forward until late 1988, nearly a year after the stockmarket crash had taken place. In sharp contrast, the Insider Trading Report was provided to the government in December 1987, only a few months after the crash. Although the government moved to approve the NZSC's takeover recommendations quickly, the time taken to prepare and present draft legislation to Parliament would have given the Treasury time to attempt to reverse, or delay, the decision. McKenzie notes that, in fact, a draft bill was prepared which was awaiting final policy implementation when the Cabinet decided "that its introduction should be deferred until after the Companies Bill had been introduced". The government's deferral of the Takeovers Bill on the basis of the introduction of other legislation is similar to the delay in considering the NZSC's nominee shareholding proposals in the early 1980s.
The Treasury's opposition to the proposed takeover legislation would have been aided by the change in the person who held the office of the Minister of Justice. Palmer, who was the Minister of Justice at the time the government said that it would take up the NZSC's recommendations, and was at that stage ranked second in the cabinet, became Prime Minister in 1989. Jeffries, who succeeded him as the Minister of Justice, was ranked lower in the Cabinet than Palmer and was not in as good a position to pursue the implementation of the NZSC's recommendations. Caygill, who was Minister of Finance and more highly placed in Cabinet than Jeffries, was at best ambivalent about the NZSC's recommendations. In fact, at the time of the introduction of the Takeovers Bill in 1991, he showed his position by indicating he favoured an approach which relied upon the directors' duties proposed in the Companies Bill 1990 to regulate takeovers, rather than a specific takeovers code or Act.
By the time of the election of the National Party in September 1990 no takeover legislation had been enacted. Rather than proceed with the takeover recommendations the National Government early in 1991 moved to set up a new body to consider securities law reform. The new Minister of Justice commented upon the setting up of this body and showed the government's intentions in relation to securities law reform:
A ministerial group on securities law reform was established in March 1991.
The group comprises eight members - four from the private sector and four
officials from the Prime Minister's Department, the Department of Justice,
Treasury, and the Ministry of Commerce. The object of the exercise is to
establish a work programme for the design of securities market regulations that
best achieve the Government's economic growth objectives. The group is to
present its paper at the end of this month.
The Minister of Justice went on to say that the areas that the Ministerial Working Group would be looking at in particular were "take-over proposals, financial reporting, and matters relating to the function of the NZSC".
This move by the government was significant for a number of reasons. First, this was the second time a government had replaced the NZSC as the reviewing body for securities regulation. While the Ministerial Working Group was only to advise on a work programme, it played a significant role in setting an agenda for reform. The government, by the establishment of this body, had ignored the NZSC and the efforts it had made to contribute to securities law reform. While the takeover proposals were back on the reform agenda, they were now to be considered by someone other than the NZSC. In addition, the Ministerial Working Group was given the task of looking at financial reporting, the latest reform project of the NZSC.
Secondly, the Treasury had obviously regained a prominent position in relation to the determination of the government's reform agenda, as a Treasury official was given a place on the Ministerial Working Group. By contrast, no member of the Securities Commission was invited onto the Ministerial Working Group by the government. Thirdly, there was a re-emergence of the explicit linking of securities regulation with achieving "the Government's economic growth objectives". No mention was made of promoting investor protection. The economic agenda had arisen once again to overcome any preoccupation with "market failure".
When the Ministerial Working Group reported it clearly showed that it did not share the NZSC's view that the securities market was effectively unregulated. In its view the problem centred, not on further regulation, but on providing individuals with greater means of private enforcement.
Of particular relevance to this discussion is the Ministerial Working Group's view on takeover law reform. It placed takeover law reform as the issue of lowest priority in the securities law reform area, after, for example, a review of the current insider trading laws which the Group considered "seriously flawed". In its view, takeover law reform should be considered, not because the NZSC's proposals would further the government's economic objectives, but because there was an expectation in the market that the issue would be addressed and because the existing legislation did "not serve the purposes for which it was intended".
The Group's final words on the NZSC's recommendations for mandatory offer and equal price rules were:
We recognise that there are competing views on the merits of equal price and
mandatory bid requirements. The Group believes companies and exchanges should
be free to impose such requirements if they wish. We do not recommend that the
Government impose them.
Despite the Group's view that reform of takeover law was of a relatively low priority, the government moved to introduce legislation on this topic on 17 December 1991. What is more significant than the introduction of this legislation is that the government would once again overlook the NZSC as the body to consider takeover law reform, despite its extensive expertise in this area.
The Minister of Justice upon introducing the legislation gave a brief overview of the history of takeover regulation in New Zealand and proposals for reform. He then referred to the NZSC's 1983 proposals and its 1988 report and commented:
The present Government is committed to completing the reform of our company and
securities law, including reform of our company takeover law. However, it has
been aware that the report of the NZSC has evoked a division of opinion, both
within the ranks of its own advisers, and in the private sector, as to whether
a mandatory bid with an equal price rule is the best way to reform company
takeover law. In the light of that division of opinion, and recognising the
flexibility and success of the takeover code in the United Kingdom, the
Government has decided to establish a takeover panel for New Zealand, its
function being to formulate a new takeover code. The Government is attracted
to the United Kingdom approach in which the market itself formulates the rules
and takes responsibility for compliance with them.
Not only had the Minister introduced a bill which would create a new body to oversee the new Takeovers Act and Code, he advised Parliament that he had already set up "a takeovers panel advisory committee" which would begin work immediately on the new takeovers code. This committee did not contain any members of the NZSC.
The creation of this "advisory committee" effectively sidelined the NZSC from the debate. In comparison with the previous year's comments on the question of takeover law reform, the NZSC's only comments in its 1992 annual report were that it "would review and comment in relation to the proposed new Takeovers Code", and it would "maintain overview of the new Takeovers Act and Code".
The NZSC's frustrations did not end there. Although the NZSC obviously preferred its own code, it was prepared to accept that another body would determine the content of the code and would have responsibility for administering it. But in August 1993 it became apparent that the Takeovers Bill, and the Takeovers Panel, might be dumped altogether, and the NZSC expressed its concern publicly. McKenzie, the NZSC chairperson at the time, commented that it would be tragic:
[i]f the considerable, even if long overdue, efforts to establish a panel and
develop a code for the protection of all shareholders were to be stalled off
yet again by the determined hostility of a few major investors whose views are
not shared by the general investing public.
When the government returned its companies and securities law package to Parliament in the middle of September 1993 it had not discarded the Takeovers Bill entirely. Rather, it acceded to views expressed by the Business Roundtable and others that the solution to the problems that existed for minority shareholders, in relation to takeovers, lay in strengthening shareholders' rights under the Companies Bill. Accordingly, while the government passed the Takeovers Act 1993, it decided not to proceed with the Takeovers Code until it could determine whether or not the Companies Bill could be effective in regulating this area on the basis that "the decision to sideline the takeovers code reflected the Government's belief that it would not pass laws unless it had to". Despite the NZSC's strong public comments, the Business Roundtable and major institutional investors clearly had greater influence on the government in this area than did the NZSC.
Accordingly, takeover law reform, one of the first initiatives of the NZSC, had drifted even further away from the position advocated by the NZSC. This further highlighted the exclusion of the NZSC from securities law reform and the re-emergence of the strength of the Treasury position.
Although the government left open the possibility of putting in place the Takeovers Code if the Companies Bill proved inadequate, the sidelining of the Takeovers Code clearly signalled a defeat for the NZSC as the promises of 1988 had by now evaporated. In 1986 and 1987 the NZSC had the option of pushing forward first with its recommendations for takeovers regulation or with its recommendations for nominee shareholding reform. It chose the latter, which ultimately appears to have been fatal to its takeover proposals.
Thus this third period saw the government gradually move away from the promise to implement the NZSC's takeover proposals to the eventual position where a completely separate body was constituted to deal with this topic. This movement reflected the re-emergence of a concern with economic objectives by successive governments and a reduction in concern for "investor protection".
The government's approach to the NZSC's review of takeovers, and its
establishment of other bodies to undertake securities law reform, highlight the
fact that the NZSC was no longer "the" review body in relation to New Zealand
securities law. Rather, the NZSC appeared to have become another market
participant with a particular approach which was perceived to be inconsistent
with government policies. Accordingly, the NZSC was effectively excluded from
the securities law reform process and had been left to make submissions to
other securities law reform bodies. The irony of this is that it was the NZSC
which had started the takeover law reform process in 1980 with its
investigations, and which had brought the issues out in the open for debate in
1983 with the publication of its proposals. Thirteen years later the NZSC
would be left merely to comment upon another agency's potential code.
V. THE NZSC'S LAW REFORM PROGRAMME: EXPLANATIONS FOR ITS FAILURE
The question is: why has the NZSC, in general, been so unsuccessful in attempting to have its recommendations accepted? Three explanations are offered here. The first is that the NZSC's lack of success is found in the obstacles it faced in the political and economic environment. The NZSC had been created in an era concerned with regulation and investor protection. The first chairperson appointed espoused this view and the law reform programmes put forward by the NZSC had this as their aim. However, development of this securities law reform agenda took place at a time when a new era based upon de-regulation of the economy, and the dominance of government policy by an economic agenda, had started to emerge. While the NZSC attempted to adapt to this change in the way it presented its proposals and argued its recommendations, its underlying rationale of investor protection and equity in the market remained the same. This underlying rationale was only to be successful during the period 1986-1989 when the government re-embraced a concept of market failure and advocated a measure of investor protection or fairness. This period, however, was shortlived and the economic agenda re-emerged in the 1990s. In the period from 1989 to the present, the NZSC again faced an environment very different from that of the late 1970s, which would ultimately lead to its exclusion or sidelining from the very reform processes it had initiated in the early 1980s.
The NZSC proposals were contrary to the positions adopted by the Treasury and the Reserve Bank, which were institutions which were able to influence the government's economic and regulatory policies. The NZSC was attempting to go against strongly-held views of well-prepared and articulate opponents. It realised this factor by the length of time it took, and the efforts it made, in the preparation of its takeover proposals, and by its continued efforts to gather evidence to support its position.
The second explanation is to a certain extent the converse of the first explanation. The NZSC, while attempting to push forward reforms against well-prepared, articulate and influential opponents, was attempting to protect a widely dispersed group of persons (particularly minority shareholders). This group was, in general, neither articulate nor well-prepared to argue and advocate in its own interests. Investors faced two particular problems under New Zealand's securities regime - the consultative process required under the Securities Act 1978, and the lack of representation in organisations which controlled the securities market.
Attempting to represent such a group poses significant difficulties for a law reform body. For example, Whitta argues that the accounting profession in Australia had captured regulation, not only of the profession itself, but also of the accounting standard-setting process. In order to overcome this lack of political acceptability to persons other than members of the accounting bodies, a "due process" approach was incorporated into the standard-setting process whereby exposure drafts were circulated to interested parties and public hearings were held before draft standards were put forward. In other words, the accounting profession attempted to increase the ambit of its control and make its standards acceptable by using a "consultative mechanism". As Whitta notes, however, this was not particularly successful as the process was still dominated by accountants and:
Significant responses from outside the profession were received only from those
directly affected by the standard in question: these contributors (usually
management interests) were small, self-organised groups with significant
financial resources and established organisation.
[i]s not surprising in light of the expressed aim of accounting standards: `to
... improve the quality of financial reporting' (ICAA 1971). Implicit in such
an objective is an investor protection role but investors as a group are widely
dispersed and hence difficult to organise and have fewer financial resources to
effectively present submissions: but standards that embody social choices will
impact quite as significantly on investors as on other financial interest
The failure of the NZSC's recommendations, or at least the takeover recommendations, have a similar foundation. The government, by requiring consultation under the Securities Act 1978, and only granting the NZSC the power to make recommendations, rather than the power to promulgate its own binding rules, effectively ensured that investor interests (and in particular minority interests) would be unrepresented, and uncatered for, in future securities law reform. The requirement for consultation was an attempt by the government to placate business interests, by avoiding control of the process by public servants and ensuring that business interests were able to influence the proposed regulations. In effect the interests of minority investors were subordinated to those of business or commerce. In addition, when the proposals were not well received, the consultative process ensured that, in the absence of political willpower on the part of the government, strong interest groups would be able to prevent the passage forward of proposals.
The consultative model under the Securities Act 1978 was not the only difficulty faced by investors. Investors have little ability to influence securities law reform and regulation given the constitution of bodies operating in the securities market. As Gaynor points out, investors have little or no representation on bodies which control or regulate the securities market. He notes that the Russell Committee had five members, only one of whom was an investment manager. Likewise, the Ministerial Working Group had seven members, only one of whom was an investment manager; the New Zealand Stock Exchange has no investor representatives and only one on its market surveillance panel out of nine; the Takeovers Advisory Panel has one investment manager out of seven members; and the Advisory Accounting Standards Committee has no investor representative. Even the NZSC's ten members do not include anyone who is "directly involved in the investment industry on a day to day basis". That the NZSC has shown such a consistent concern for the issue of investor protection must reflect, at least to a certain extent, the commitment of the previous and current chairpersons of the NZSC to investor protection. A full-time chairperson is obviously able to exert an enormous influence on the NZSC's agenda and direction.
The Securities Act's consultative model and lack of investor participation in the securities market meant that the NZSC was largely unsupported in its stance. The government took up the NZSC's recommendations in late 1987 only when it became a political necessity. The use of the consultative model and the lack of investor representation were exemplified in the process surrounding the takeovers code. In the introduction of the takeovers code, the government was prepared to abdicate primary responsibility for the contents of that code. The content of the code was to be left to market participants, again after a period of consultation with "the business community". The extent to which "the market" was to have control over the code is clear from the fact that, while under the original Bill the Takeovers Panel was required to show the Minister that it had considered all the matters set out in clause 11 before the code was presented for approval by the Governor-General, this requirement was removed from the Bill as reported back. In addition, the Panel was in a strong position as it was given the responsibility of determining the content of the code, with the code to be approved by the Minister of Justice and to have the force of law, while Parliament's role was limited to disallowing the code after it became effective. The Panel's position would not necessarily allow for investors' interests to be advocated or advanced, particularly as the Bill did not expressly provide for membership of the Panel to include a representative of investors' interests. The only requirement for appointment to the Panel was that, in the opinion of the Minister, the person appointed was "qualified or experienced in business, accounting or law".
The third explanation for the NZSC's failure lies in the government's superficial and transitory attitude towards investor protection during the 1978 to 1993 period. In 1978 investor protection was a primary concern. In the early to mid-1980s the government was, at best, ambivalent towards increased securities regulation, even though the NZSC based its proposals upon improved investor protection and fairness in the securities markets. It was only the stockmarket crash and the resulting political fallout which prompted the government to return to the rhetoric of investor protection in the late 1980s. This return was shortlived, and left the NZSC with a brief opportunity which it used effectively in relation to nominee shareholding. For takeover law reform, however, it was too slow in putting forward its proposals. By the time they were submitted to the government the investor protection era had almost finished, and 1989 and beyond saw little effective progress on this issue. The NZSC, as a new institution in the political environment, was hampered by its limited resources, and lack of political clout. As a result its securities law reform projects were at the mercy of the government's political moods. That this does not need to be the case is clear from the example of overseas jurisdictions (for example, the United States) where the securities markets regulatory agencies promulgate regulations taking into account market views, but without being subject to the whims of the government of the day.
VI. POSSIBLE CHANGES TO THE SECURITIES LAW REFORM PROCESS
Having analysed the NZSC's law reform efforts, I will comment briefly on what might be done to improve the securities law reform process. The first reform that is suggested is to address the issue of consultation. Consultation per se is not a problem, and, in fact, it can lead to more effective regulation by taking into account differing perspectives on the form and content of regulation. However, consultation creates problems when all views (or at least a wide range of views) are not able to be included in the process. In the securities markets investors, and particularly minority interests, are the ones who are excluded from the process for the reasons discussed earlier. This, coupled with the requirement of persuading the government of the political wisdom of a proposal in the face of opposition from well-organised groups, means that securities law reform is largely an ineffective exercise. What is needed is a system of consultation with representation from persons who can effectively present the views of investors. This could be obtained in a number of ways. First, the NZSC could be required to consult explicitly with minority investors. In its reports the NZSC would have to advise on the consultation process, the persons who were consulted, and a summary of their comments or views. Secondly, the government could require by legislation that all bodies in the securities market (for example, the New Zealand Stock Exchange, the Takeovers Advisory Panel, the Accounting Standards Review Board, any committee set up to advise on securities law reform, and even the NZSC itself) should have members who represent minority investor interests and who are appointed by, for example, the NZSC. These persons (in order to ensure that their views are not effectively silenced) should have the right to comment publicly about the affairs of their respective bodies. In addition, the NZSC should consult with each of these persons and include in its annual report a short report from each of them as to matters which impinge upon the minority investors' interests and the effect of the operations of the body on which they sit upon the interests of these investors.
The second major reform that should be put in place is to empower the NZSC to promulgate its own regulations without passing through the legislative process. The NZSC would still be required to engage in a wide-ranging consultative process (as discussed above), but once this process has been completed the NZSC could issue binding regulations. This would ensure that the NZSC is free of direct political interference, and that the reform of New Zealand securities laws is not subject to the mood swings of the particular government in power. It is unlikely that the NZSC would introduce regulations that would be condemned outright by the market as the NZSC is composed of persons who are market participants (including, with the reform suggested above, minority investor interests). In order to ensure that the government's economic policies are taken into account, the Securities Act 1978 could be amended to include a provision similar to section 26 of the Commerce Act 1986. This section requires the Commerce Commission, when making a decision, to take into account statements of government policy which have been transmitted to it by the government and published in the Gazette.
With the two reforms suggested above, the NZSC could be transformed from a body
which has a securities law reform function in name only, into one that could
function effectively. It would have the advantages of greater participation in
the reform process, the ability to implement reforms more rapidly, and
avoidance of the necessity of leaving securities law reform to the government's
The NZSC moved to engage in broader securities law reform issues from the date of its establishment, largely due to the efforts of its first chairperson, Colin Patterson. However, over the period of 1979 to 1993, the NZSC faced a changing economic and political scene. Its reforms were met by an increase in the influence of the Treasury, which was strongly opposed to the NZSC's reforms. Initially this opposition only resulted in the non-implementation of the NZSC's recommendations, but by the early 1990s it would be partly responsible for the NZSC's effective exclusion from the securities law reform process.
If one analyses the path taken by the two major reforms discussed in this article, one could argue that the NZSC has a poor record. It was only successful with its nominee shareholding proposals as it was able to tie this to the insider trading legislation, legislation which was required by a government forced into action by the obvious problems in the securities market in the mid-1980s. The NZSC's recommendations for takeover law reform, however, foundered. Its error in relation to this issue was not to provide a report on takeovers in either late 1986, or in 1987, based upon the work that it had already undertaken. If the NZSC had acted quickly then the government might have enacted such a bill in 1988.
Perhaps the best that the NZSC could claim is some success in having nominee shareholding and insider trading legislation passed, at a time when the government was inviting such reforms, and some success in placing the takeover law reform on the agenda. For this last reform, the NZSC could at least take some satisfaction from the existence of legislation on these issues, although the value of the Takeovers Act 1993 is yet to be determined. However, the ultimate cost for the NZSC in putting forward these reforms appears to have been not only a rejection of its overriding concern with investor protection but also a rejection of the NZSC itself as "the" securities law reform body.
Although the securities law reform initiated by the NZSC has been largely unsuccessful, the NZSC still has a direct role to play in the ongoing review of the Securities Regulations which are an important part of the regime established by the Securities Act 1978. This, however, is the place from which it started in 1979. Under the present securities regime the NZSC's only hope for a resurgence in this area may lie in the electoral changes which occurred at the 1993 general election. This may result in a corresponding change in attitude to securities regulation, and in particular a change in the government's perception of the NZSC's role.
 Darvell, "The Securities Act 1978: A New Direction to Investor Protection"  New Zealand Law Journal 53.
 Farrar, "The Securities Act 1978" (1979) 8 New Zealand Universities Law Review 301, 311.
 The Securities Act 1978 set up a regime to control the offering of securities to the public. The market in which securities are offered to the public for the first time is referred to as the "primary securities market". A security is defined in s 2(1) of the Act and includes shares (a form of equity security), debentures (a form of debt security), and interests in bloodstock or forestry partnerships (a form of participatory security). With the exception of certain securities referred to in ss 6 and 6A, the Securities Act 1978 does not control transactions involving securities once they have been issued to the public. This market is referred to as the "secondary securities market" which is regulated by the Securities Amendment Act 1988 and the Takeovers Act 1993. In this article the areas of the secondary securities markets that are discussed are nominee shareholding, insider trading and takeovers. Nominee shareholding refers to shares held in the name of one person, while the beneficial interest and control is held by another. Insider trading refers to the use of non-public information by a person connected with a publicly listed company for the purpose of making a profit or avoiding a loss by the sale or purchase of shares to, or from, a person who does not possess that information. Takeovers occur where a person acquires sufficient shares in a company so that they are able to control that company. This control may be obtained by purchasing less than 100% of the shares of the company. The takeovers that will be referred to in this article are those which are commonly referred to as hostile: ie where the directors of the target company are not consulted prior to the attempted bid and may be against it.
 See eg Banoff, "The Securities Commission's Takeover Proposals: A `Law and Economics' Perspective" (1985) 2 Canterbury Law Review 298; and McKenzie, "Takeovers - The New Zealand Experience" in Farrar, J H (ed) Takeovers, Institutional Investors, and the Modernisation of Corporate Laws (1993).
 S 4(1).
 S 4(2).
 The only effective regulator in the securities area is the New Zealand Stock Exchange. See Fitzsimons, "The New Zealand Stock Exchange: Rights and Powers" in Walker, G and Fisse, B (eds), Securities Regulation in Australia and New Zealand (1994).
 MacArthur Committee, Interim Report of the Special Committee to Review the Companies Act (1971) 25.
 See Lindroos and Walker, "A Short History of Securities Regulation in New Zealand" in Walker and Fisse, supra note 7, at 71-73.
 Walker "The New Zealand National Interest in Securities Regulation" (1992) 11 JIBL 452, 454.
 NZPD Vol 416, 1977: 5339.
 Walker, supra note 11, at 452-453.
 NZPD Vol 417, 1978: 703. The Securities Advertising Bill became the Securities Act 1978.
 See NZPD Vol 417, 1978: 703.
 NZPD Vol 421, 1978: 3935-3936. The Minister stated that the NZSC would have the function of reviewing practices relating to securities "and to comment thereon to any appropriate body. This [function] recognises that the commission's review function is not limited to legislative matters, but that it can make its contribution over a wider field". (emphasis added)
 Apart from the reform proposals to be discussed in this article (nominee shareholding, insider trading and takeovers) the NZSC has been involved in other law reform projects. These include examining the Corporations (Investigations and Management) Act 1989 which has led to reforms (see Corporations (Investigations and Management) Amendment Act 1993). The NZSC has also reviewed financial reporting under the Securities Regulations 1983 and is proposing reforms (NZSC, Annual Report (1993) 16). However, with the exception of reforms proposed for investment advisers (NZSC, Annual Report (1993) 18), these reforms are generally limited to existing legislation, and in the case of the securities regulations are within the original jurisdiction of the NZSC.
 Three studies which will be referred to here are: Boston, "The Treasury and the Organisation of Economic Advice: Some International Comparisons" in Easton, B (ed), The Making of Rogernomics (1989) (Boston); Oliver, "The Labour Caucus and Economic Policy Formation, 1981-1984" in Easton, B (ed) The Making of Rogernomics (1989) (Oliver); and Goldfinch and Roper, "Treasury's Role in State Policy Formulation during the Post-War Era" in Roper, B and Rudd, C (eds), State and Economy in New Zealand (1993) (Goldfinch and Roper).
 Boston, supra note 19, at 69.
 Ibid, 70.
 Ibid, 71.
 Ibid, 72.
 Idem. Boston quotes one view that in 1978 alone 75% of Cabinet submissions were commented upon by the Treasury. One could assume that the areas seen to have "economic significance" would have increased since that time to encompass nearly all areas of government activity.
 Ibid, 72-76.
 Ibid, 76.
 Idem. As Boston notes during the crucial first four years of the Labour Government there were effectively three finance ministers, Douglas, Prebble and Caygill, all of whom were able politicians and who held senior positions (idem). In addition, as Oliver points out, a Treasury official had been seconded as an adviser to the Opposition since the mid-1970s (supra note 19, at 18).
 Boston, supra note 19, at 77.
 Ibid, 78.
 Goldfinch and Roper, supra note 19, at 52.
 Boston, supra note 19, at 76; and Goldfinch and Roper, supra note 19, at 53.
 Boston, supra note 19, at 76. See also Goldfinch and Roper, supra note 19, at 55; and McCoy, "Deregulation: Public Utilities and New Zealand Economic Reform" in Head, B and McCoy, E (eds), Deregulation or Better Regulation? (1991) 58.
 Oliver, supra note 19, at 27.
 Walker, supra note 11, at 455. See Goldfinch and Roper, supra note 19, at 55-64, where they analyse the Treasury's policies and their application.
 Roper and Rudd, "New Zealand's Political Economy" in Roper and Rudd, supra note 19, xiii.
 NZPD Vol. 421, 1978: 3943.
 NZPD, Vol. 417, 1978: 703.
 NZSC, Annual Report (1980) 1.
 Farrar, supra note 2, at 312. Colin Patterson died in early 1990. His appointment as chairperson had been extended twice (see "A Battler for Fair Disclosure, Colin Patterson, Dies", New Zealand Herald, February 6, 1990). Colin Patterson was succeeded by Peter McKenzie, who had joined the NZSC in 1986 (NZSC, Annual Report (1986) 2).
 Patterson, "Private Rights v. Public Interest"  New Zealand Law Journal 340.
 Securities Commission, Annual Report (1980) 4.
 Ibid, 5. The NZSC noted the publication of the terms of reference on 16 May 1980 in its Annual Report for the year ended 31 March 1980.
 Ibid, 3.
 Ibid, 4.
 NZSC, Annual Report (1980) 3.
 The NZSC issued its first proposal in 1980 (Proposals for the enactment of regulations under the Securities Act 1978 (1980)). In the Annual Report for 1982 the NZSC stated that it had published "[i]ts second draft of proposals for securities regulations on 27 October 1981, and invited interested parties to comment upon them by 28 February 1982. Written submissions were received from 38 persons and organisations. There is a general acceptance in the commercial community of the Commission's proposals, but some points of detail are being reviewed. The Commission completed its public hearings on the proposals on 24 March 1982." (NZSC, Annual Report (1983) 3).
 NZSC, Annual Report (1983) 4.
 NZSC, Annual Report (1984) 3.
 NZSC, Annual Report (1981) 4.
 NZSC, Annual Report (1982) 4.
 NZSC, Annual Report (1985) 5.
 NZSC, Annual Report (1986) 5 and NZSC, Annual Report (1987) 4.
 See NZSC, Contributory Mortgages: Proposals for Regulations under the Securities Act 1978 (1981) 19 and 22.
 NZSC, Annual Report (1983) 4.
 NZSC, Annual Report (1982) 6.
 Ibid, 5.
 NZSC, Annual Report (1981) 4.
 NZSC, Review of the Law and Practice Relating to Shareholdings by Nominees (1979) 2.
 NZSC, Annual Report (1982) 4.
 NZSC, Annual Report (1983) 4.
 NZSC, Annual Report (1984) 5.
 NZSC, Annual Report (1985) 6.
 The Treasury was required to comment upon matters having "economic, financial or revenue implications" (Boston, supra note 19, at 72).
 New Zealand Treasury, Regulation of Company Takeovers, Treasury Submission to the Securities Commission (1984) (Treasury Takeover Submissions) 17.
 As noted earlier the NZSC started investigation into takeover law reform in May 1980 (NZSC, Annual Report (1980) 5).
 NZSC, Company Takeovers: A Review of the Law and Practice (1983) (Company Takeover Proposals (1983)).
 Ibid, 7. See also NZSC, Annual Report (1985) 6.
 NZSC, Company Takeovers: A Review of the Law and Practice (1983), Vol 1, 106.
 Ibid, 107 -118.
 Banoff, supra note 4, at 305.
 Farrar comments that the report had the misfortune to be overtaken by "Rogernomics" and "received brutal treatment at the hands of the Treasury and Reserve Bank" (Farrar, "Company Takeovers - A Critical Examination of the Securities Commission's Report" (1989) 13 New Zealand Universities Law Review 312). He also noted that they commissioned Associate Professor Peter Dodd, an expert in Chicago school economics, to assist them "in their endeavours" (idem).
 Supra note 71.
 Ibid, 20.
 NZSC, Annual Report (1984) 5.
 Securities Act 1978, s 70(3).
 NZSC, Annual Report (1986) 6.
 Ratner (an NZSC officer) points out three "lessons" from the NZSC's investigations: the unequal treatment of shareholders, the prevention of competitive bids, and the utilisation of inside information (Ratner, "Company Takeovers"  New Zealand Law Journal 5, 8).
 NZSC, Annual Report (1986) 5.
 See Farrar, supra note 78, at 312.
 NZSC, Annual Report (1986) 2 and Annual Report (1987) 2.
 NZPD, Vol 495, 1988: 8550.
 NZSC, Insider Trading: Report to the Minister of Justice by the Securities Commission (1987).
 NZSC, Annual Report (1988) 2.
 NZSC, Insider Trading: Report to the Minister of Justice by the Securities Commission (1987) Vol 1, 95.
 See NZSC, Annual Report (1982) 6.
 Boston, supra note 19, at 78.
 NZPD, Vol 484, 1987: 745. See also Palmer, "Reforming Securities Regulations in New Zealand" (Continuing Legal Education Programme, Auckland District Law Society, 1989).
 NZSC, Annual Report (1988) 4.
 NZPD Vol 490, 1987: 5280.
 NZPD Vol 495, 1988: 8550.
 NZSC, Annual Report (1980) 5.
 Company Takeover Proposals supra note 73.
 NZSC, Annual Report (1989) 4.
 NZPD Vol 493, 1988: 7541.
 For further evidence of this divergence in approach see the Minister of Justice's comments about a few "truths" in a seminar in 1989 (Palmer, supra note 96).
 One of the NZSC's major law reform efforts which occurred during this period, but which will not be considered in this article, was for financial reporting. The NZSC opened a formal review in 1985 (NZSC, Annual Report (1985) 7), but did not issue a discussion paper until 1989 (NZSC, Capital Structure and Financial Reporting in New Zealand (1989)). Although the government introduced a Financial Reporting Bill in 1991, the NZSC's report was not favourably received by the government and had limited impact.
 Report of the Sharemarket Inquiry Establishment Unit (1989). (Second Russell Report).
 NZPD Vol 503, 1989: 14022.
 NZPD Vol 486, 1988: 2134.
 On 3 August 1993, the current Chief Executive of the NZSC, John Farrell, wrote to Mr R C Wheeler, of the Department of Justice, about a request by the author for a copy of the report referred to above. Mr Farrell stated: "My recollection is that there may have been a proposal under discussion between the Minister of Justice and the Chairman of the NZSC of the day in February 1988 for the Commission to undertake an in-depth review of its role, functions and funding. I think this was superseded by a proposal for an independent body to undertake this review. This, I believe, was the genesis of the Ministerial committee of inquiry chaired by Sir Spencer Russell".
 NZPD Vol 484, 1987: 745.
 The Russell Committee was specifically told not to deal with the Securities Amendment Act and the NZSC's recent recommendations on takeover law (Report of the Ministerial Committee of Inquiry in the Sharemarket (First Russell Report) (1989) 1).
 Walker, supra note 11, 453.
 NZPD Vol 494, 1988: 8292.
 NZSC, Annual Report (1990) 4.
 Report of the Ministerial Committee of Inquiry into the Sharemarket (1989) 5.
 Ibid, 10.
 Ibid, 25.
 See eg NZSC, Annual Report (1990) 10.
 NZPD Vol 484, 1988: 745.
 See NZSC, Annual Report (1989) 4.
 NZSC, Annual Report (1990) 6.
 NZSC, Annual Report (1991) 10.
 NZPD Vol 503, 1989: 14022.
 Boston, supra note 19, at 72.
 Ibid, 73.
 NZPD Vol 493, 1988: 7541.
 McKenzie, supra note 4, at 118.
 NZPD Vol 521, 1991: 6353.
 Ibid, 6354.
 NZPD Vol 513, 1991: 1126.
 The members of the Ministerial Working Group included an official from the Treasury, the Prime Minister's Department, and the Ministry of Commerce (NZPD Vol 513, 1978: 1126). McKenzie notes that the Ministry of Commerce expressed similar concerns to the Treasury in relation to takeover regulation (supra note 4, at 132).
 Idem. See Walker, supra note 11, at 453.
 Report of the Ministerial Working Group on Securities Law Reform (1991) 4-5 (Executive Summary).
 Ibid, 9 (Executive Summary).
 Ibid, 38.
 Ibid, 7 (Executive Summary).
 Report of the Ministerial Working Group on Securities Law Reform (1991) 45.
 NZPD Vol 521, 1991: 6350.
 NZPD Vol 521, 1991: 6351.
 Idem. See the Takeovers Bill 1991, clause 11; and the Takeovers Act 1993, s 20.
 NZPD Vol 521, 1991: 6358. See the Takeovers Act 1993, s 20(1)(a) and (b).
 Ibid, 6352.
 NZSC, Annual Report (1992) 18.
 In its 1992 Annual Report, the NZSC merely stated that it would "review and comment in relation to proposed Takeovers Code, maintain overview of new Takeovers Act and Code" (NZSC, Annual Report (1992) 18).
 "Govt Retreats on Takeovers Code to Back Minorities", New Zealand Herald, August 31, 1993.
 "Justice Minister Battles to Save Sinking Takeover Bill", National Business Review, September 3, 1993.
 "Delay with reform to July and takeover code out", New Zealand Herald, September 15, 1993.
 The Business Roundtable's arguments against the Takeovers Code were similar to those put forward by the Treasury in 1984 - that is, that the code would stymie takeovers, shield incompetent management and fail to reward controlling shareholders by denying them a premium over minorities for their shares if they sold out (see "Justice Minister Battles to Save Sinking Takeover Bill", National Business Review, September 4, 1993).
 "Delay with reform to July and takeover code out", New Zealand Herald, September 15, 1993. At the time this article was written the position of the Takeovers Code was in a state of flux. As noted above, the government's policy was to wait and see the effectiveness of the new Companies Act's provisions on takeover activity. In April 1994, the New Zealand Stock Exchange (NZSE) released draft listing rules which did not include a takeovers code. As a consequence, the Minister of Justice announced that he would re examine the issue of the takeover code ("Takeover Code in Late Rally", Australian Financial Review, May 10, 1994). The NZSE responded with a takeovers code which effectively regulated the notice to be given, but did not require payment of an equal price or mandatory bids. After public criticism of the proposals by the New Zealand Institute of Directors and the Securities Commission ("Takeovers Debate Goes on Despite Need for Reform", National Business Review, June 10, 1994; "Clayton Rides into Takeover Town", National Business Review, May 27, 1994), the NZSE finally put in place a modified version of its draft. This was obviously insufficient to satisfy the Minister of Justice who proceeded to appoint a panel to formulate the takeovers code ("Graham sets Takeovers Code rolling again", National Business Review, October 21, 1994). No member of the NZSC is on the panel., although Kevin O'Connor (the chairperson of the Stock Exchange's Market Surveillance Panel) has been appointed (New Zealand Gazette (1994) 3151; "Takeovers Code Panel To Go Under Spotlight", New Zealand Herald, October 29, 1994). The government, by establishing a panel, has backed away from its promise to allow time to see whether or not the provisions of the Companies Act 1993 would prove sufficient to regulate takeovers as only three months have elapsed since that Act came into force. However, what form the Takeovers Code will take remains to be seen.
 The success of these institutions is perhaps exemplified by the success of the Business Roundtable (a group sharing similar policies with the Treasury and the Reserve Bank) in having the Takeovers Code sidelined at the very last moment ("Delay with reform to July and takeover code out", New Zealand Herald, September 15, 1993).
 The Securities Act 1978, s 70(3), requires the NZSC to advise persons who would be affected by its recommendations of the proposed recommendations and to give a reasonable opportunity to make submissions, and also requires the NZSC to give fourteen days notice in the Gazette of its intention to make recommendations.
 Whitta, "A Law Unto Themselves - Accountants' Capture of Regulation" (paper presented at the Australasian Law Teachers Association Conference, 1992). He analysed the standard-setting process as an example of the "public choice" theory. For an overview and discussion of this theory, see Simpson, "Public Choice Theory and Securities Regulation in New Zealand" in Walker and Fisse, supra note 7.
 Ibid, 11.
 NZPD Vol 420, 1978: 2916.
 Gaynor, "How to Ensure Better Protection for Shareholders" in New Zealand Law Society Conference Proceedings (1993) Vol 1, 46, 60.
 Supra note 144.
 Ibid, 14598. The Takeovers Act 1993 now provides that the Takeovers Panel is required to provide an opportunity for submissions to be made (s 25) and also requires the Takeovers Panel to consult with the Minister of Justice when formulating the takeovers code (s 26).
 Clause 16 required that the Minister be satisfied that the Takeovers Panel had considered all the objectives set out in clause 11.
 See the Takeovers Bill as reported back from the Justice and Law Reform Select Committee on 1 April 1993, and the Takeovers Act 1993, s 28.
 NZPD Vol 521, 1991: 6352.
 The Minister of Justice, quoting clause 6(3) of the Takeovers Bill (NZPD Vol 521, 1991: 6358).
 In 1980 the NZSC's budget was $327, 000. During the 1980s the responsibilities of the NZSC grew, but funding did not dramatically increase until after the stockmarket crash. At this stage funding increased from $758, 000 to $1, 391, 300. While the increase appears significant, the increased responsibilities of the NZSC under the Securities Amendment Act 1988 have to be taken into account. When the NZSC took action against Sir Robert Jones in 1992/93 the government had to allocate an extra $280, 000 for its legal expenses ("Fighting Fund", New Zealand Herald, June 8, 1993). This is a substantial amount given that this was just one piece of litigation in which the NZSC was involved, and $280,000 represented nearly 15% of the government grant for 1992/93.
 In the United States, the Securities Act 1934, s 23(a)(1), provides the Securities and Exchange Commission with the power to make rules and regulations so as to implement the provisions of this Act.
 If the NZSC was required to have an investor representative member then obviously that person should be appointed by someone other than the NZSC.
 For example the takeovers regime proposed by the NZSC was not against the views of the majority of market participants. The draft code proposed by the Takeovers Panel Advisory Committee was quite similar to the NZSC proposals in that it required an equal offer to all shareholders when an investor wished to acquire more than 20% of the shares of a company. This draft was supported by an overwhelming number of favourable submissions, including sharemarket analysts ("Most Support New Takeovers Code", New Zealand Herald, July 12, 1993).
 See NZSC, Annual Report (1991) 11; NZSC, Annual Report (1992) 6; and NZSC, Annual Report (1993) 16.
 The Alliance has advocated providing legislative protection for the public and investors, and reviewing the powers and responsibilities of the New Zealand Stock Exchange and the NZSC ((1993) 403 Law Talk 8). But see Bollard, Notes on Economic Policy Setting under MMP NZIER (1994) 8.